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Can Rebranding Baubles Boost Zale?

Zale needs to support its brands better and shoot for better-than-middling results.

Summer wasn't a strong season for low-end bling-slinger Zale(NYSE:ZLC). In line with a prior announcement, sales and earnings performance in the company's fiscal fourth quarter didn't exactly sparkle like a diamond.

Overall sales climbed a bit less than 4% as the company posted a very small (0.1%) same-store sales decline. Same-store sales were mixed across the board, and margins slipped. As a result, operating income fell by more than a third, and net income fell by more than 40% for the period.

This is now going on four years with full-year operating income not really going anywhere. And that's despite a retail environment that has been pretty accommodating toward non-necessities such as $300 denim and expensive leather bags. Not surprisingly, then, return on equity (a reasonable measurement of overall management performance) has been slipping.

I still think that Zale's core problem is trying to compete as a jack of all trades (and master of none). Claire's(NYSE:CLE) is better at selling trinkets to teens. Tiffany(NYSE:TIF) and others are better on the high end. Rule Breaker recommendation Blue Nile(NASDAQ:NILE) and Wal-Mart(NYSE:WMT) are expanding their respective pieces of the middle market.

I'm actually not trying to suggest that Zale is already roadkill here. In fact, I think I see some of the aspects of a successful retail turnaround here. The brand is still respected, the balance sheet is pretty clean, and the company already has numerous stores in place around the country. With a solid foundation in place, better performance is certainly a possibility.

The company has already taken some steps in the right direction -- remerchandising Zales and deciding to close some Bailey Banks & Biddle locations. But I think they need to do more, especially on the marketing side. Retailing is about perception and branding, and I just couldn't tell you what Zale's stores are about. If you say "Claire's" or "Tiffany," most people will form a clear image of the styles and values being offered. Say "Zale," and I think most people would just shrug and say, "Diamonds, right?"

If management can get moving again, this could be an interesting stock. That could be a significant "if," though, since the current CEO has been with the company for much of this current flat patch. On the plus side, the company is producing respectable cash flow and buying back its stock -- suggesting that even if sales don't come around, the probable downside is that the company just keeps shuffling along like a retailing zombie rather than tanking and becoming roadkill on the bling superhighway.